The effects of fiscal policy when planning horizons are finite

• Verfasst von: Lustenhouwer, Joep [VerfasserIn]
• Verfasst von: Mavromatis, Kostas [VerfasserIn]
• Titel: The effects of fiscal policy when planning horizons are finite
• Verf.angabe: Joep Lustenhouwer, Kostas Mavromatis
• Ausgabe: Online early view
• E-Jahr: 2023
• Jahr: 24 October 2023
• Fussnoten: Gesehen am 27.11.2023
• Titel Quelle: Enthalten in: Journal of money, credit and banking
• Ort Quelle: Oxford : Wiley-Blackwell, 1969
• Jahr Quelle: 2023
• Band/Heft Quelle: (2023), early view, Seite 1-34
• ISSN Quelle: 1538-4616
• DOI: doi:10.1111/jmcb.13100
• Datenträger: Online-Ressource
• Sprache: eng
• Sach-SW: bounded rationality
• Sach-SW: finite planning horizons
• Sach-SW: fiscal policy
• K10plus-PPN: 187126698X

Abstract

We study the importance of planning horizons for fiscal multipliers in a New-Keynesian model with bounded rationality. We show that, when agents have shorter planning horizons, government spending multipliers are smaller, whereas labor tax cut multipliers are larger. Furthermore, Ricardian equivalence breaks down, and transfer shocks feature a negative multiplier. Results are driven by the cognitive limitations of finite planning horizons that lead agent's expectations to deviate from the fully rational benchmark. We find larger investment responses, which are more in line with empirical findings than those of models with longer planning horizons, rule-of-thumb households, or a Blanchard-Yaari structure.